For many low-income Americans, owning a home is a reliable path to wealth accumulation. In terms of wealth inequality, though, how far does home ownership go toward closing the gap between minority households and white households?
An award-winning paper co-authored by Ashleigh Eldemire-Poindexter, assistant professor of finance at the University of Tennessee, Knoxville’s Haslam College of Business, Kimberly F. Luchtenberg (American University) and Matthew M. Wynter (Stony Brook University) examines this question.
The researchers used internal administrative data from the U.S. Department of Housing and Urban Development (HUD)’s Housing Choice Voucher (HCV) program. This is the first large-scale empirical study of the program, which provides rental payment assistance for low-income households. Some recipients are eligible for assistance with mortgage payments and homeownership expenses.
The team evaluated households that had access to the same level of housing assistance to buy or rent in the same area but faced different opportunities for wealth accumulation due to race. Tracing wealth outcomes of households that previously had accessed housing assistance and eventually became homeowners during the sample period of 2000 to 2020, the authors investigated how homeownership affected racial disparities in wealth.
“The takeaway is that homeownership helps to build wealth for low-income households but the effect is much less for minorities,” Eldemire-Poindexter said.
Racial Wealth Disparity Among Low-Income Homeowners
Measuring wealth in terms of cash value of financial assets (as reported from HUD) plus home equity, the study found that low-income households transitioning to homeownership experience significant wealth gains compared to renting. However, while white households accumulated $6,100 relative to their tenure as renters, minority households accumulated a mere $1,500, a difference of $4,600. As renters, the wealth difference between minority and white households was only $1,200.
Numerous factors contribute to the wealth disparities between minority and white households transitioning to homeownership, financial fragility and home location being chief among these.
The study found that households with a higher degree of financial fragility (the ratio of total housing expenses to monthly income) while transitioning to home ownership accumulate less wealth from the transition and that financial fragility increases racial wealth disparities. Minority and white households that were above the median for financial fragility increased their wealth by about $1,300 and $6,600, respectively. For those below the median, the transition increased the wealth of minority and white homeowners by about $2,300 and $5,800, respectively.
Home location also plays a significant role in wealth accumulation. Because a neighborhood’s racial composition can affect the appreciation of home values there, minority households may find that their homes appreciate at lower rates relative to white households.
The researchers found that these racial wealth disparities become more pronounced over time, noting that the wealth differences they documented occurred upon the transition to homeownership and not before. In each of the three years prior to making the transition, the wealth differences between minority and white households were relatively small. However, within the third year of homeownership, white households accumulate significantly more wealth than minority households.
“Our results suggest that homeownership can significantly help households to accumulate wealth, but that homeownership can make wealth disparities between minority and white households more pronounced,” the study concluded.
Eldemire-Poindexter expressed gratitude toward the researchers’ colleges and universities for their assistance in facilitating the proposal for this study, enabling them to highlight a population not often featured in finance academia.
“We’re talking about low-income households, so if any group of people is in need of having some liquidity, some type of real assets, this is that pool,” she said. “It just feels so real to do work that actually matters.”
“Does Homeownership Reduce Wealth Disparities for Low-Income and Minority Households?” was published in the Review of Corporate Finance Studies in April 2022 and received the journal’s award for Best Registered Report of 2022. The paper is available online.
Stacy Estep, writer/publicist, firstname.lastname@example.org